Indian Stock Markets Show Volatile Session Despite Trade Deal Optimism
The Indian equity benchmarks, the Sensex and Nifty 50, extended their gains for the second consecutive trading session on Wednesday, January 28, primarily influenced by positive sentiment surrounding the newly announced India-EU free trade agreement. However, what has been hailed as the "mother of all trade deals" failed to trigger a sharp or sustained trend reversal in the domestic market, with early advances quickly paring back.
Morning Rally Fades as Gains Prove Short-Lived
In morning trading deals, the equity benchmark Sensex jumped by over 600 points, translating to a gain of nearly 0.80%. However, this upward momentum proved fragile. The index soon pared most of these gains, drifting to an intraday low of 81,887.93. This level was merely 30 points above its previous close of 81,857.48, highlighting the market's inability to hold on to early optimism.
Similarly, the NSE counterpart, the Nifty 50, mirrored this pattern. It also rose by approximately 0.80% during the morning session but soon slipped to an intraday low of 25,225.70. This represented a marginal increase of just 0.20% above its previous close of 25,175.40, underscoring the lack of decisive bullish conviction.
Why the India-EU FTA Failed to Charge Up the Bulls
While the India-EU free trade agreement has undoubtedly underpinned overall market sentiment, analysts note it has not sparked aggressive or sustained buying. One of the primary reasons is that the market had already largely discounted this development. Signals emerging from international forums like Davos, particularly following geopolitical tensions involving the US and European nations, had prepped the markets for such an agreement.
"The India-EU trade deal is a huge positive, but it was largely discounted by the markets. Markets respond only when something unexpected happens. This was already expected. That is why it has not boosted market sentiment as expected by many," explained VK Vijayakumar, Chief Investment Strategist at Geojit Investments.
Experts emphasize that while the FTA is a long-term positive for India's trade and economic landscape, it is not an immediate trigger. The market continues to grapple with more pressing headwinds, including relentless foreign institutional investor (FII) selling, a mixed bag of corporate earnings, and ongoing geopolitical uncertainties.
The Critical Overhang of the India-US Trade Deal
Market participants widely acknowledge that the India-EU agreement cannot offset the impact or importance of a potential India-US trade deal. The United States remains India's largest single-country export market and its most significant bilateral trade surplus partner.
"Of course, India-EU FTA is a big deal, but then it is important to understand that this is not a substitute for the India-US trade deal. We have a $41 billion trade surplus with the US and only $15 billion surplus with the EU. So, the India-US trade deal is more important," Vijayakumar elaborated.
Pankaj Pandey, Head of Research at ICICI Securities, noted that the market is in a phase of slowly digesting the India-EU trade news while awaiting finer details. "I think we need further details to sort of come out on this India-EU trade deal. So, while yes, it is positive, the market is looking for some near-term opportunity to sort of come back," Pandey stated.
Budget Expectations and Market Positioning
Unlike previous years, the domestic market has not witnessed a significant pre-budget rally. The limited gains observed could be attributed to tactical short covering in the derivatives market.
"The short positions on F&O are significantly higher. So, ahead of the budget, no one would want to carry such a high short position. Therefore, some bit of short covering is what we are sort of sensing," Pandey added.
Overall, the market is not carrying major expectations from the upcoming Union Budget. However, analysts suggest that major policy reforms, particularly in sectors like affordable housing, or positive surprises on the taxation front—especially relief for Foreign Portfolio Investors (FPIs)—could provide a much-needed lift to market sentiment.
Corporate Earnings: The Ultimate Market Trigger
Amidst the global noise and domestic budget chatter, corporate earnings remain the most critical fundamental factor for the market. Strong earnings growth has the potential to attract FIIs back, significantly improving overall sentiment.
The third-quarter results for Indian corporates have presented a mixed picture so far. While there are some positive green shoots, these are being overshadowed by concerns that the Indian rupee's weakness and uncertainties stemming from US tariff policies could dent the prospects for healthy corporate profitability in the near term.
In summary, while the India-EU trade deal provided a temporary fillip, the Indian stock market's trajectory remains contingent on a confluence of factors: the resolution of the India-US trade dialogue, concrete policy actions in the Budget, and, most importantly, a sustained recovery in corporate earnings to counter the persistent selling pressure from foreign investors.
